Chain reaction

Reactors have been shuttered. Plants sold.
Does this signal the end of the nuclear era? Not in this state,
where the controversial power source is making a comeback

The country's energy outlook changed in 1951 when an experimental reactor employed nuclear power to illuminate four light bulbs. This new energy source, Americans were told, would be "too cheap to meter."

Then came years of sky-high electric rates. The accident at Three Mile Island drove costs up and turned public opinion against the technology. The explosion at Chernobyl intensified fears. It seemed the glow was gone from the nuclear promise.

So why is nuclear power poised to make a comeback in Illinois? Given its history, a resurgence wouldn't seem likely. But that's exactly what is happening in this state, and in some other states that have nuclear plants.

The pending $8.2 billion merger of Commonwealth Edison's parent company, Unicom Corp., with Philadelphia-based nuclear giant PECO Energy will make Illinois' nuclear plants part of the largest fleet of commercial nuclear reactors in the nation and the third-largest in the world. The merger will affect the vast majority of the state's electric customers -- the 3.4 million customers Chicago-based ComEd has in northern Illinois, as well as the downstate customers of Decatur-based Illinois Power, which recently sold its only nuclear plant in Clinton to a partnership shared by PECO.

In fact, for the first time in years, industry experts are talking about the possibility of building new nuclear plants. While only about 20 percent of the nation's electricity is generated by nuclear power, electricity consumption is growing dramatically -- and someone will have to provide it. At the same time, restrictions on polluting fossil fuel plants are expected to continue, giving the nuclear industry another argument to make for itself.

"I think nuclear power has a very good future," says Oliver D. Kingsley Jr., the turnaround expert hired by ComEd in 1997 to head its nuclear generation group. "We're in a renaissance period. Our costs are going down, not up."

This comeback is the latest link in a long chain of events for the controversial technology. Ironically, it started with safety concerns, which sparked high electric rates to pay for the protections required by the federal government. In turn, those high rates provided the impetus for government deregulation of the industry. And deregulation set the stage for some utility companies to get out of the nuclear business and others, such as ComEd and PECO, to expand. History, it seems, has come full circle.

Atomic energy first showed its awesome power to the world in 1945, when atomic bombs were dropped on the Japanese cities of Hiroshima and Nagasaki. In the years that followed, scientists dreamed of using the atom to provide unlimited power for all our energy needs. By using nuclear fission -- the term for splitting uranium atoms, a process that releases large amounts of energy -- scientists could create a self-sustaining chain reaction that could heat water, produce steam and drive turbines to produce electricity. They believed it would be cheap, clean and protected from shortages of fossil fuels.

The first commercial nuclear power plant began operating in 1957 in Shippingport, Pa. The U.S. government quickly got behind nuclear power, encouraging construction of more reactors. The oil crisis of the early 1970s and poor air quality around major cities such as Chicago also pushed many utilities toward nuclear programs.

"It was go burn more coal, or go nuclear," says ComEd's Kingsley. "Environmentally, this was a very good decision."

It was a good economic decision, too. Under state regulation, utilities were allowed to bill ratepayers for nuclear construction expenses -- and make a profit to boot. To many companies, it made better financial sense to build a $1 billion nuclear plant that would generate funds on

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"It didn't matter how much you spent, it didn't matter if you were efficient, because under the regulatory system, you always got a return on your investment," says Jim Riccio, senior analyst for Public Citizen's Critical Mass Energy Project, an industry watchdog.

But the nation's nuclear industry was about to be severely tested. In 1979, a series of technical and human errors led to the partial meltdown of a reactor at Three Mile Island in Middletown, Pa. The accident released radioactive gas and the Pennsylvania governor urged pregnant women and children living near the reactor to evacuate. No one was killed, but the fear instilled by the accident remains to this day.

"There has been a lot of second-guessing inside and outside the industry" about the decision to go nuclear, says Jim Monk, president of the Illinois Energy Association, a utility trade group, and former chairman of Indiana's utilities regulating agency. "There was a lot of encouragement from the federal government to go that route. Unfortunately, this little thing called Three Mile Island got in the way."

After Three Mile Island, the cost of nuclear construction skyrocketed, as the federal government imposed more stringent safety standards. Plants that would have cost $1 billion to build now cost two, three or four times that amount. Nuclear energy was no longer a moneymaker.

Three Mile Island also drove public opinion sharply against nuclear energy. The 1986 Chernobyl accident in the former Soviet Union only solidified that sentiment, even though the Chernobyl reactor used a riskier design that was not allowed in the United States.

Meanwhile, serious flaws were appearing in ComEd's management of its plants -- flaws that would result in six of its then-12 reactors being placed on the Nuclear Regulatory Commission's watch list of troubled plants. (All have since been removed from that list.)

Increasing construction costs stemming from additional safety measures sent consumer electric rates to an all-time high, especially in states such as Illinois, where utilities -- and ratepayers -- had invested heavily in nuclear power. By 1995, Chicago had the highest electric rates in the Midwest and the third-highest rates of major cities nationwide -- about $763 a year for the typical homeowner, according to surveys by the Citizens Utility Board. Most Illinois customers were paying up to 40 percent more for electricity than their neighbors in Wisconsin.

But John and Jane Consumer weren't the only ones complaining about those rates. The state's large industrial companies were clamoring for a better deal, too. It was primarily their lobbying effort that led to the 1997 state law designed to open Illinois to electric competition. To date, 24 states and the District of Columbia have opted to deregulate utilities operating within their borders -- and large nuclear states such as California, Pennsylvania and Illinois are leading the way.

Deregulation is designed to lower costs in the long run by increasing competition. But there will be a transition period. Utilities, including

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ComEd, that invested in expensive nuclear plants under the old assumptions and regulatory rules will be allowed to continue to charge ratepayers for those construction debts, called "stranded costs." In Illinois, the transition will last until 2006. "Illinois consumers through the 1990s paid among the highest rates in the Midwest in order to subsidize Commonwealth Edison's nuclear planning and construction mistakes," says Howard Learner, executive director of the Environmental Law and Policy Center and founding chairman of the Citizens Utility Board. "As we go into the 2000s, northern Illinois consumers are continuing to pay very high rates, in part to subsidize ComEd's nuclear mistakes."

The deregulated market has been structured to mitigate losses under the new rules. But it also offers new ways to profit from nuclear power. In some states, utilities have been ordered to sell plants to stimulate competition or have chosen to get out of the nuclear business on their own. At the same time, utilities that have chosen to focus on nuclear power have been buying these plants, often for far less than their value. Such restructuring already is taking place in Illinois. What has this meant for consumers? Good news for the big guys. Thus far, not-so-good news for the little guys.

This state's experiment with deregulation began last October when large industrial users and some smaller commercial customers were allowed to choose their electric providers. Residential customers won't see competition until 2002. But, unlike the deregulated long- distance telephone industry, there hasn't been a crush of companies vying for the business. Thus far, only 13 companies have been certified to compete in the Illinois electricity market.

In the meantime, customers of ComEd and Illinois Power got a 15 percent rate cut in August 1998 to bring them closer to what other Midwesterners are paying. Another 5 percent cut is set to take effect in 2002. Customers who are served by other utility companies are getting cuts of about 2 percent to 5 percent.

It's still early, but while competitors seem eager to get the business of large industrial customers, some of the smaller commercial customers aren't getting much of a break. And consumer advocates worry that when residential competition begins in 2002, there will be a similar lackluster desire to get the average household's business. Providers might not care about the family sitting on the couch at home, needing electricity for their TV.

PECO Energy spokesman Bill Jones concedes residential customers won't get as big a break as large industrial users unless they band together in cooperatives to purchase electricity. "Then you have some bargaining power." Another reason most consumers are unlikely to see lower bills anytime soon is that under the restructuring required by the deregulated utility market, competitors who want to resell power generated by ComEd must calculate ComEd's costs into their own rates. As a result, critics argue, promised savings for consumers could be a long time coming.

And if utilities build another generation of reactors, will that power finally be too cheap to meter? Some utilities are bucking conventional wisdom about nuclear power, betting it will have a strong future as our nation's energy needs grow. They're also betting that this time it will be less costly to manage.

ComEd, for one, is refocusing its mission as a nuclear power producer. Assuming the merger between ComEd parent Unicom and PECO Energy goes through -- the target date is September -- the new company, to be called Exelon, will be involved in running up to 20 nuclear reactors in the United States. ComEd's Kingsley has no doubt the Illinois reactors will be busy: "Northern Illinois is a very high-growth area, a huge number of jobs [are] being added, and that requires more energy."

For its part, PECO, under its AmerGen Energy Corp. partnership with British Energy Corp., has been buying nuclear power plants at bargain-basement prices. AmerGen recently picked up Illinois Power's Clinton plant, which cost $4.3 billion when it came on line in 1987, for a mere $20 million.The deal allows Illinois Power to write off the loss on its historically troubled plant and lets PECO acquire a future moneymaker free of old construction debt.

"The exorbitant cost of nuclear power was primarily the capital cost to build the plants," argues PECO's Jones. "[Without that financial burden], there's a tremendous future for nuclear power. All these anti-nuclear people who said nuclear power is dead, well, I hate to tell them, but it's alive and well and increasing in value."

PECO and ComEd point to improvements in both their nuclear fleets while touting their goal of becoming the best-run nuclear power entity in the United States. PECO's Peach Bottom plant in Delta, Pa., went from what the NRC called a disgrace to the industry to producing electricity for as little as 1.4 cents per kilowatt hour, as cheap as coal and less expensive than oil or gas, Jones says.

At ComEd, Kingsley has brought a more businesslike style to the company, replacing several senior managers and demanding strict attention to detail. Even anti-nuclear

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